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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program 2004-2006: The Pacific
Executive SummaryPacific developing member countries (PDMCs) are widely dispersed over a large geographical area and differ significantly in size, population, endowments, opportunities, and development constraints. Because of their special features, PDMCs face unique but common challenges. The economic performance of the Pacific in the 1980s and early 1990s was disappointing, despite a high investment ratio supported by generous aid flows, and was associated with high population growth rates. As a result, poverty has been increasing. The political environment in the Pacific has been quite unstable, and frequent change of government is a common feature. There are serious governance issues. The institutional capacities are weak, reflecting the limited availability of human resources and low skill levels. Pressure on the environment has been increasing due to population growth, urbanization, the use of inappropriate technologies, and climate change. Private sector development has been weak and remains one of the most difficult challenges facing PDMCs. A number of factors, both natural and introduced, constrain business activity in the Pacific. Although the Pacific has made significant progress in human resources development over the last three decades, the larger PDMCs tend to be those with the poorest social indicators. In the environment sector, there has been some progress in terms of policy reform, regional agreements, and application of human and financial resources. However, overall environmental management presents an unsatisfactory picture associated with unsustainable exploitation of natural resources and inadequate risk management. There is a well-developed framework of regional organizations in the Pacific. The average annual flow of grant funds for regional projects has been about $67 million. During the last 26 years (1977-2002), the Asian Development Bank (ADB) has given about $22.0 million of cumulative grant assistance for regional technical assistance to the Pacific. There has been no lending project of a regional nature extended by ADB to any group of PDMCs. No two Pacific countries have a common land boundary, and many of them are separated by vast expanses of ocean. There is limited economic integration and intra-Pacific trade is below 5% of total PDMC trade. Accordingly, compared to the other parts of the world, regional cooperation in the Pacific appears to be driven by a very different set of factors, which appear to be the following: (i) the need for a collective voice in a world dominated by large countries and economic and political blocs (as buyer, as seller, and as a political bloc); (ii) the challenges arising from isolation; (iii) the need for economies of scale, particularly in building appropriate knowledge and technology for the specialized but common needs of the Pacific; (iv) the lack of specific skills in individual countries; (v) the sharing of knowledge and experience; and (vi) external agencies' interest in cooperation among PDMCs for cost and strategic considerations. From a regional perspective, the key development challenges facing the Pacific are (i) increasing productivity, (ii) reducing transaction costs, and (iii) prudently managing the environment and natural resources. These are the necessary underpinnings for sustained economic growth, achievement of the Millennium Development Goals (MDGs), and poverty reduction. Two key factors that explain the "Pacific paradox" of low economic growth alongside high investment are the low efficiency of public expenditure and investment, and weak private sector development. Transport and other transaction costs are high due to the small size, remoteness, and geographical fragmentation and dispersion of the PDMCs. These explain the high cost structure in these economies, which adversely affects the level of consumption, business profitability, and quality of life. Economic activities in the Pacific revolve around the environment and the ocean. Almost all Pacific countries rely heavily on primary commodity production and exports, marine-based resources, and tourism. Thus, a key to the prosperity of the Pacific is the sustainable management of these natural resources and maintenance of the pristine environment. These common problems define the agenda for regional cooperation in the Pacific. Because of the low level of economic integration and high geographical dispersion, the nature and scope of regional cooperation in the Pacific vastly differs from regional cooperation elsewhere. Because of the geographical dispersion, the scope for cooperation among PDMCs in physical investment or infrastructure at the regional level is limited. One of the most critically needed regional public goods for the Pacific is appropriate knowledge and technology related to the specialized but common needs of these countries. It is also important to build related regional institutional capacity, with a view to obtaining the benefits of economies of scale and improving the availability of skills in the Pacific. Accordingly, the key theme of ADB's regional cooperation strategy will be to build and/or strengthen knowledge and regional institutional capacity in the following four focus areas: public expenditure and investment, private sector development, transport and communications, and environment and natural resources. In this process, ADB will also support building and/or strengthening regional consensus and the local pool of expertise. To ensure shared interest, ownership, and participation of the PDMCs, the regional cooperation strategy will respond to the differences across the Pacific by variation in emphasis and approach for different groups of countries in the region. ADB would also seek greater consultation and partnership with regional organizations and focus on enhanced participation of local officials and experts. The regional lending program for the Pacific for 2004-2006 comprises three regional loan projects amounting to $8.8 million (average about $2.9 million per annum) from the Asian Development Fund (ADF) out of the portion earmarked for regional projects, and cofinancing amounting to $1 million. The actual ADF allocation will be guided by the requirements of the performance-based allocation policy. The regional technical assistance program for 2004-2006 comprises 13 regional projects amounting to about $4.5 million (average about $1.5 million per annum) in TA grants from ADB and about $2.0 million in grants from other sources. The strategy assigns high priority to ADB collaborating and coordinating with all development partners and stakeholders. The main risks to the strategy and program emerge from the possibility of a weakening of Pacific governments' commitment to reform in the focus areas of this strategy, policy reversals, lack of consensus among PDMCs, lack of experience with regional lending products, and the presence of self-serving "in-groups" in regional organizations. However, the level of risk faced by this regional strategy and program is manageable, and is mitigated by the process of ADB operations and measures, such as consultative processes and coordination with external agencies, inbuilt within the strategy itself. The development, design, and implementation of projects will further address these risks. The 2004-2006 program supports the implementation of the strategy. The program is well sequenced, and focuses on building knowledge and institutional capacity. ADB will closely monitor implementation and assess the impact of the new strategy and program.
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